Reality Checks Along the Way

by: Richard A. Anderson

The recent stock market volatility has induced fears that the stock bull market that started in March 2009 following the Global Financial Crisis may be coming to an end. And these fears have only been stoked by the financial media. See some of the headlines below.

MarketWatch: “The Wall Street analyst who called this stock-market rout sees another nasty drop for the S&P 500”

CNBC: “Bank of America Merrill Lynch: The ‘Great Bull’ Market is ‘Dead’”

Forbes: “Ghosts of 1987 Stock Market Crash Suddenly Appear”

Business Insider: “Next Stock Market Crash: Decade-Old Secret Weapon is Vanishing for Equities”

The financial media preys on our emotions because it is their job to draw you in. Whether it’s a TV show with inflammatory opinions or a “news story” online with an attention-grabbing headline, they want you to watch or read. Their goal is advertising dollars. Our goal is to help you ignore what you can’t control and remain invested in a portfolio designed to help you meet your financial planning objectives.

As of Friday’s close, the S&P 500 is down 11.47% from its peak on September 21st. As the table below shows, this is not an uncommon occurrence. This is the 23rd time since March 2009 that the S&P 500 has fallen greater than 5%. You read that correctly.

The S&P 500 has nearly quadrupled since its low point in March 2009, but there have been periods of market declines that have tested investors’ resolve. Each one of these periods was a reality check for investors, reminding us that the returns we accrue for investing in stocks comes with risk. It seems like when stocks are churning out high returns, our perception is that there is no risk. Stocks will go up forever. When we have a pullback in stocks, our perception changes dramatically. No longer do we think stocks will go up forever, now we think stocks will continue to go down forever. Yet we know neither extreme is the case.

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The average decline of the 22 prior stock pullbacks is 9.2%. Each one of these periods also sparked concerns that the stock bull market was coming to an end and it was time to abandon stocks in favor of safer investments. However, each of these declines were followed by recoveries and eventually new high-water marks.

This most recent bout of volatility could be the start of a further decline in stocks that market experts have been predicting for years. Or stock market losses could be recovered quickly on the road to new all-time highs. Only time will tell. I do know one thing for certain though: selling in response to a market decline is not the answer.